Economy: Budget Statement

Lord Marlesford Excerpts

Thursday 22nd March 2012 Lords Chamber

[Lord Marlesford]

My Lords, the toughest challenge that politicians have is to face reality. I know of no one who has in his career been better at facing reality, both in business and in politics, than my noble friend Lord Heseltine. That is why I am so glad that he will be facing, and I hope telling us how to deal with, the reality of our own competitiveness. That is a crucial issue, but facing reality is actually a challenge for all of us. It is a challenge that the financial world failed massively, especially in the United States in the years of unsound lending to unsound borrowers that led up to 2007, and the inevitable financial crisis that has created a continuing problem for the world economy.

The Chancellor started his speech by referring to two major risks to Britain’s economy—the situation in the euro area and a further spike in oil prices. I will say a brief word on both before making some comments on the tax changes and suggesting one or two further possibilities for progress.

On the euro area, everyone would now agree that the fundamental design of the euro is flawed—a single currency without a single fiscal and budgetary policy. It is a flaw that the designers must have been well aware of. Indeed, some cynics even think that the intention was to have it as a means of forcing a crisis that would result in the integration of the EU economy in a way that was, and probably still is, politically unacceptable. The real problem with the euro area is the refusal to face reality. The powers at the centre of the EU still deny that Greece is bust and has defaulted on its debt. It is assumed that the ECB backed by Germany can bail out any euro country that is threatened with default. Bailouts lead to bailouts until eventually there is a country that is too big to bail out.

Even today, the EU Commission is producing some really dangerous, ill thought-out proposals, and I will refer to one—the financial transaction tax. Were it to be introduced, it would do immense damage to the City of London, which is the world’s leading financial centre, followed by New York and Hong Kong. Financial services account for some 10 per cent of the UK’s national income and 11 per cent of government tax receipts. Perhaps more relevant is that, as it has been designed, the FTT is actually unworkable. I hope very much that when the moment comes, Her Majesty’s Government will veto it.

On oil, the price will, over the coming years, certainly fall steeply due to increasing competition from oil and gas from shale and from the revival of nuclear power. However, as the Chancellor said, there is now a risk of a sudden price hike, which of course is the equivalent of a tax increase and is therefore strongly deflationary. The risk is almost entirely political and was very well debated in your Lordships’ House last Friday. The overall conclusion of that debate was that the problems of the Middle East can now be met only by diplomatic and economic policies. Military action in that area could be catastrophic for the world economy.

I turn now to the Budget. What a change there has been in the political backdrop to Budgets in Britain. That is epitomised by an article by Chris Mullin in Monday’s Times. I do not disagree with the word of that article. Twenty-five years ago, Mr Mullin was editor of Tribune and 30 years ago he edited Tony Benn’s Arguments for Socialism. Now he writes:

“As for the Lib Dems and their ludicrous talk of mansion taxes and tycoon taxes, these are simply gimmicks”.

He ends his article by saying:

“Polls tell us that most people favour increased taxes for the rich, but that is because people tend to favour taxes they won’t have to pay. In any case, simply increasing taxes on top earners does not begin to raise the sums needed. That can only come from the middle classes. It is time politicians plucked up the courage to say so”.

That is another example of the need to face reality.

In four years, from 1975-76 to 1978-79, when the noble Lord, Lord Healey, was Chancellor, we had a top marginal rate tax of 98 per cent. That cut in at a threshold of £24,000. In today’s money, that would be £110,000. Those were the days when there was mass emigration of some of the most talented in Britain—the so-called brain drain. Had I qualified in any respect, I might well have been part of that. Yet today, the argument on all sides of the political spectrum is whether the top tax rate at £150,000 should be 50 per cent, 45 per cent or 40 per cent.

I remember very well sitting in the Press Gallery in the House of Commons in 1988 when the noble Lord, Lord Lawson, announced a top tax rate of 40 per cent. The opposition Benches exploded with anger. It is the only time in history when the House of Commons has had to be suspended in disorder during a Budget speech. However, that top rate of 40 per cent lasted more than 20 years, right through the Labour Government, and the 50 per cent rate was one of the bequests of Mr Gordon Brown to this Government.

As the excellent New Statesman, which I read every week, had on its cover last week, it is truly “the end of socialism”. Socialism was a casualty of reality—of the determination and energy of human beings, the recalcitrance of human behaviour and the inability of Governments to run business.

None of that means that further tax changes are not needed, and I have time to suggest only one. It is absurd that council tax—a well designed and efficient tax—should be allowed to get hopelessly out of date through administrative inertia. There are many houses, particularly in London, worth well over £1 million, which are not even in the existing top band, which comes in at a value of £320,000. We do not need extra bands, but the thresholds of the eight existing bands should be changed. At the moment, band A has a value of up to £40,000. That could become £100,000, with subsequent bands at £150,000, £200,000, £300,000, £500,000, £750,000, £1 million and £2 million. The differential in the rates of council tax could be changed as well if it was thought that owners of the more expensive houses should pay a reasonably non-proportionate tax. Yet the 1 per cent levy over £2 million suggested by Mr Cable is merely, to borrow from Mr Mullin, a “gimmick” to which I am afraid I would add the adjective “vindictive”.

The key to introducing such a system would be to do it only when a property changed hands. That would be administratively simple. Transfer prices have to be reported to the land registrar anyway, and stamp duty—I welcome the new rates—would continue to be payable. It would merely be a matter of reporting the change in ownership to the local authority that levies the council tax. Thus the buyer would know exactly what rate of council tax he or she would have to pay. There would be no hardship for existing occupiers. The two banding systems would exist side by side. Of course, it would take a generation before every house was in the new band. That might have some temporary depressing effect on the price of some houses, but that could be an added attraction.

Finally, I will add one other word on fairness. In my book, it is immoral to give state handouts to those who do not need them at the cost of not having enough money for those who do. For those at the bottom, a large part of their income has to be in the form of a social wage, but there are many benefits that could and should be taxed. The winter fuel allowance is an obvious one. Meanwhile, I am all in favour of getting more people at the bottom out of the tax range altogether. The Budget takes a major step in that direction.